CIMB Research downgrades Karex to reduce, lower target price

KUALA LUMPUR: CIMB Equities Research has downgraded condom producer Karex Bhd to reduce from hold with a lower target price (TP) of 50 sen as near-term outlook remains weak.

It said on Wednesday the previous TP was 61 sen while the last traded price was 74 sen.

The research house said Karex’s FY6/18 core net profit was below expectations, making up 90% of its and 71.6% of Bloomberg consensus full-year estimates.

“The steep 58.2% on-year decline in FY18 core net profit was mainly due to: i) stronger ringgit, ii) higher raw material costs and iii) competition in the tender segment.

“Despite recent weakness in RM/US$ and low latex prices, Karex’s earnings should remain weak from higher marketing expenses and raw material prices,” it said.

CIMB Research cut its FY19-20F estimates by 14.5%-20.3% to account for lower sales volume and higher operating expenses.

To recap, it said Karex’s FY6/18 revenue grew 12.9% on-year, due to higher condom sales and increase in average selling prices.  

EBITDA margins, however, waned to 4.6% (-9.1% pts on-year) due to: i) pricing competition, especially in the tender segment, ii) weakening of the US$/RM and iii) increase in raw material prices and overall operating expenses.

“Despite raising ASPs, we gathered that the quantum of increase was insufficient to fully pass on the cost increases,” it said. 

As a result, FY18 core net profit declined to RM14.1m (-58.2% on-year) after adding back one-off write-offs of inventories amounting to RM3.8m.

On a on-quarter basis, 4QFY6/18 revenue and core net profit declined by 3.2% and 42.4%, respectively. 

“The weak set of results was mainly due to: i) less profitable product mix, ii) increase in operating expenses and iii) higher depreciation charges (12.6% on-year). 

“We gathered that the less profitable product mix was mainly due to bulk orders in the tender segment which have lower margins,” it said.